Old consensus: we need Freddie and Fannie in order to make housing “affordable.”

New consensus: we need them in order to “prevent further house price declines,” in other words, to make housing less affordable …

Government interference in housing markets, which helped produce the disorder known as the financial crisis, is still producing disorder…

The effort to prop up home prices does the following:

1. Diverts capital from other uses.

2. Uses up taxpayer money that could be spent on other things.

3. Increases the wealth of people who find suckers to buy their houses at too-high prices.

4. Decreases the wealth of the suckers who buy now.

5. Decreases the liquidity and mobility of people who cannot find rational buyers for their houses because rational buyers do not buy into a rigged market.

6. Decreases the investment opportunities for rational buyers, who are unable to buy homes in an un-rigged market.

The old government-backed system had a rationale of sorts in the old industrial order, providing a “geographic Keynesianism” which spurred consumption of durable goods coming off of U.S. assembly lines – everything from cars to refrigerators, washer-dryers, air-conditioners, and TVs. But little of that is produced in the U.S. anymore – it’s now a subsidy to offshore manufacturers. And the economy is far less manufacturing-intensive and far more knowledge-driven. These newer economic structures come along with much greater labor market flexibility and mobility, and conventional housing policy is thus at odds with Kling’s point #5. It’s time to put this bad policy to bed. But, we’re faced with an Olsonian political bind where there is not enough political clout to counter the housing and related lobby. And as Olson long ago pointed out, it’s just these kinds of political constraints that put nations and regions on the road to economic decline. Are counter-forces sufficient to overcome them? That seems to be the real question.

This entry was posted on Tuesday, August 24th, 2010 at 12:59 pm and is filed under Housing. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

One Response to “The Great Housing Policy Distortion”

Reflecting briefly on US history, it seems the only times when the population (and lobbyists, perhaps) accepted major, radical shifts were when they were connected to patriotism, frequently a war effort.

The new unsubsidized housing paradigm would need to be sold as patriotic. But, doing that would likely require a level of bi-partisan support. Bipartisanism seems to be absent in the US right now.

Plus, I’m not sure that enough politicians agree that subsidizing housing isn’t a good thing (in fact, that may be something which both Democrats and many republicans actually agree on). It’s been part of a foundation of US life–suburban home ownership, shopping at malls, owning and driving cars, motherhood, apple pie, waving a flag.